Problem 1 - Greg Morrison recently graduated from mortuary school. He is considering opening his own funeral home. A funeral home is a high-fixed cost business, as it requires considerable expenditures for facilities, labor, and equipment, no matter how many families are served. Assume the annual fixed cost of operations is $800,000. Further assume that the only significant variable cost relates to burial containers like urns and caskets. An average casket costs $1,200. Greg's banker has asked a variety of questions in contemplation of providing a loan for this business.
(a) If the average family is charged $6,000 for services and a burial container, how many families must be served to clear the break-even point?
(b) If the banker believes Greg will only serve 100 families during the first year in business, how much will the business lose during its first year of operation?
(c) If Greg believes his profits will be at least $100,000 during the first year, how much is he anticipating for total revenue?
(d) The banker has suggested that Greg can reduce his fixed costs by $150,000 if he will not buy any vehicles. Greg can instead rent vehicles as needed. The variable cost of renting is $700 per family served. Will this suggestion help Greg reach the break-even point sooner?
Problem 2 - Air Mall produces a catalog that is placed in airline seatbacks during international flights. Passengers typically skim the catalog during flights and can buy selected merchandise from flight attendants, duty and tax free, while over international waters. Below is a report for a recent period:
|
Total
|
Beverages
|
Jewelry
|
Electronics
|
|
Sales
|
$2,600,000
|
$1,400,000
|
$500,000
|
$700,000
|
|
Variable expenses
|
1,635,000
|
980,000
|
200,000
|
455,000
|
|
Contribution margin
|
$965,000
|
$420,000
|
$300,000
|
$245,000
|
|
Fixed expenses
|
900,000
|
300,000
|
300,000
|
300,000
|
|
Income (loss)
|
$65,000
|
$120,000
|
$-
|
$ (55,000)
|
The fixed expense is the amount paid for printing the catalog and paying the airline to include the item in seatbacks. Management is evaluating discontinuing the sale of electronics products. Fixed costs will not change; however, jewelry sales are expected to increase by 30%.
Determine if overall income will be improved if the sale of electronics products is ceased.